Socialism and the Centrally Economy: Incentives under Central Planning

Incentives under Central Planning Put yourself in the place of a typical plant manager in the Soviet Union whose operations are managed by Gosplan and are not self-financing. Your prime objective, and the criterion on which you'll be evaluated for bonuses, advancement, and other rewards, is to meet the goals of the plan. This means you are required to meet the output targets that are assigned to you. Notice that your objectives don't necessarily include cost minimization and manufacturing quality products that satisfy your custom-ers. There are no rewards for producing goods of better quality than those called for by the planners or for varying the product mix in ways that may enhance customer satisfaction. As a manager, you'll also be cautious about exceeding your output targets, which increase in the future if you're too zealous in cranking out goods. A higher output target could mean a lower bonus for you. Prior to perestroika, output, rather than profits, was the goal in the Soviet economy. Because the output mix favored by planners was heavy industry rather than consumer goods, planners maximized output of steel, coal, and energy, which are used as inputs in new investment or in military goods. The planning goals affect incentives in unusual ways. For example, geologists in the Soviet Union who drill for oil have been rewarded with bonuses after they drill a minimum number of meters into the ground each month. However, workers and managers know that the drills work more slowly as they go deeper into the ground. To make sure they get their bonuses, the drillers drill lots of shallow holes! The incentive is therefore to drill to maximize the meters per month rather than maximize oil discoveries!' In other words, managers are often evaluated on their inputs rather than their output. A goal of the restructuring programs is to force managers to pursue profits and avoid distortions in incentives that waste economic resources. Investment in the Soviet Union Most investment in the Soviet Union is done by the state. The planners control the future as well as the present by determining how funds are allocated to expand productive capacity. Financing of new ventures has been under the centralized control of Gosplan. Funding for independent new ventures by small-scale innovators has been hard to come by. The annual growth rate of real GNP in the Soviet Union fell from more than 6 percent in the early 1950s to less than 3 percent in the late 1970s. In the early 1980s the growth of real GNP in the Soviet Union was estimated by the U.S. Central Intelligence Agency to average 2 percent annually. Since 1987 growth of real GNP has been below 2 percent and real GNP actually fell in 1989 according to CIA estimates. One estimate of combined input productivity growth indicates that total productivity growth was negative throughout the 1970s. * Productivity growth remained negative in the 1980s. The falling GNP growth rate in the Soviet Union could be attributed to the stifling effect of centralized financing of new projects and the planners' apparent bias toward large-scale investment. There is a great deal of ideological conflict in the Soviet Union regarding invest-ment. The Marxian ideology maintains that capital is unproductive. Following this reasoning, loanable funds that are used to finance capital should not be subject to interest charges, because investments do not generate any marginal return to pay those charges. Conflict over use of the interest rate as a price to compare the marginal return to an investment with its marginal cost has made it difficult for Soviet planners to achieve efficiency in investment decisions. The ideological conflict has turned capital investment into a purely administrative task based on national priorities as determined by the planners.